China’s Economy – Percentage Growth Explained in Small Numbers

In the last piece we learned that China has a GDP per capita of around $4,750 (at least it did in 2010), today I’d like to look at growth rates in terms of that number.

There’s another big headline to go with this figure though the number isn’t quite as big, it’s “China’s economy grows at 8-9% year on year!” and we’re told that this figure is amazing compared to our own economic growth rates which, financial crises aside, tend to be around 2-3%.

One of the things I've learned while writing this is that I don't really know a darned thing about Burundi. Like for example; how beautiful its capital city looks over the waters of Lake Tanganyika

But what do these numbers really mean for the people who live in our countries? Let’s start with the poorest country in the world – which according to the three estimators we looked at yesterday (the IMF, CIA Factbook and the World Bank) is probably Burundi in Africa (actually there are other countries which might be poorer but Burundi is the poorest nation to make all three lists – in the case of the other nations they were excluded from one or more list because there was too little data to draw a conclusion on). Burundi has a GDP per capita of $200. That’s not a typo – there’s no missing zeros, it’s $200.

If Burundi were to receive an economic stimulus of epic proportions and its economy were to double in one year – that’s 100% growth rate. That number would increase to $400. That extra $200 per person a year would certainly have a dramatic effect on the lives of the people of Burundi (assuming it didn’t all end up in the hands of an offshore bank account for the country’s leaders but was shared relatively equitably amongst the population). But in global terms, Burundi would still be poor – in fact it would only move 4 or 5 places up the table and be marginally richer than Ethiopia but still poorer than Eritrea.

Welcome to Bujumbura, what is the purpose of your visit? English teacher, eh? Security!

The number you would see in the press however is 100% growth rate, probably followed by an alarming set of exclamation marks, then there would be talk of billions flowing into Burundi and no doubt a whole host of happy English teachers on the next flight to Bujumbura to cash in on this “boom”.

It’s with this in mind that we explore China’s growth rate, 8-9% sounds impressive when compared to our own measly growth rate, so let’s put a dollar figure on that. 8.5% of $4,750 is $403! In fact China’s 8.5% growth is worth twice as much as 100% growth in Burundi, which is pretty impressive though not for the people of Burundi. That’s $403 more per person for China to spend on health care, roads, education, etc. and not to mention to put towards wages to boost living standards in general.

Now let’s compare that to the United States which has $48,150 per person to go round to start with, a 2% growth rate for that number yields an impressive $963! That’s right 2% growth in the US economy gives you more than twice as much as that 8.5% growth in the Chinese economy.

In fact if the United States economy stayed at zero growth and China could sustain this level of growth indefinitely (and it can’t and we’ll look at that another day) it would take China, 31 years to catch up to the GDP per capita of the United States.

Even in this fantasy situation it does not mean that China would be equally developed as the United States in 31 years’ time – because during most of that time the Americans would be spending far more per person per year than the Chinese on developing their nation, because they’d have more money until the Chinese caught up.

Images like this one, misleadingly imply that the two countries are coming off the same starting line and are neck and neck in the race to world economic domination - nothing could be further from the truth

Yes, it’s true that if you use the big number China will almost certainly “overtake” the US in the next few years, but that small and more useful number shows that in reality it’s going to take a lot more time – even in perfect conditions, which won’t happen, for over 30 years.

The $5,000 is also an important number to our deluded English teachers who think they’re going to be millionaires overnight, because it shows that while there may be “lots” of money in China – on a per person basis there isn’t all that much to be had. And as we’ll find out in another installment of this theme, at this moment in time Chinese people, through necessity, want to keep hold of their money rather than spend it.

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This rate of growth already seems to be showing its ugly side in the Chinese economy. I’ve only been to a few cities in this beautiful country, but each one has a similar look with so many vacant apartments. The numbers indicate an expanding wallet as does the amount of construction, but if those wallets don’t open then those apartments don’t get filled up.

I would venture to guess that the majority of China doesn’t make $4750 a year, but much less. A handfull of rich could offset the GDP for a barrel full of poor.

There are some interesting reasons for the empty apartments – which I’ll come to a bit later in all of this and you’re right most Chinese make much less, and I’ll be posting (it’s already written) on income inequality tomorrow. This topic is so huge I think I could write about it for ten years and not scratch the surface. 🙂

Most of the locals that I have befriended are willing to share a little bit of their personal life with me and we can talk about money. Noodle shop owners and quickie food store couples are doing just as you explained and filling their pockets for future use. There doesn’t seem to be any outpouring of funds into home expansions or a new set rims for the hummer. The money they make is improving their basic needs such as schooling and health care, as long as its provided. There is a long way to go in the GDP before that money springs from their piggy banks.

I am really enjoying your articles, so please keep them coming. However, I did, want to make a couple of points about GDP. The usage of GDP commences during WWII, when being used to monitor war production. After the war, there came the standardization of its use across the board. In the late-1950s, Kenneth Galbraith, in his book, “Affluent Society”, challenged its use as both a measure of “economic growth,” and as a measure of “human progress.” I say this because I think that it is critical to understand what many perceive as inherent limitations of GDP.

After Galbraith cast the dye, his criticism took hold. So much so that today many economists, including the Bretton Woods Institutions (i.e., World Bank, IMF, etc.); OECD; UN; and others such as even French President Sarkozy recognize the limitations of GDP. A couple of years ago, Sarkozy actually commissions a study on how to find an alternative to what he and others associated with the aforesaid economic institutions are now increasingly referring to as the — “GDP-fetish!”

In other words, many deem it an obsolete measure of progress; hence, the name GDP-fetish!

Again, this is not meant to take away from your excellent work. I am just trying to interject, though GDP is still a standard form of measurement, that when it comes to accurately measuring GDP, economic growth, and “human progress” or what some economists refer to as “well-being,” it is wanting in several respects.

In other words, the problem of the GDP measurement itself notwithstanding, one should exercise some caution when using GDP to draw conclusions about human welfare, human progress or well-being. You can say that I am trying force a more human aspect into your analysis, though your analysis is well done.

For instance, of the earlier named institutions, the UN Development Programme stands apart from the rest, because they take in consideration life expectancy and standard of living as determined by GDP, including other progress indicators (i.e., the Genuine Progress Indicator) such as income equity, pollution, and health care. All of which is attributable to the limitations of GDP as a measure of human progress.

Now, this is a simple synopsis of the GDP-fetish. A more detailed explanation would take pages, because its growing usage in the post-WW II era associates with a host of economic forces (i.e., world economy of the 1950s and 1960s, Development or Modernization theory (i.e., Walter Rostow and others), Marshall Plan, economic development of former colonies, etc).

However, I am also going to leave you with a simple illustration of the problem of GDP, and its potential to be a greater problem. The problem actually comes from Samuelson’s textbook, “Economics.”

The Problem: Assuming a man marries his maid, and all else is equal, would GDP fall?

The problem may sound simple, but trust me; it presents a unique problem for many economic professors.

As for China, and the macro economic analysis of its National Bureau of Statistics (NBS), well, that is a story for another day.

Finally, all of this is simply fodder for though; and by the way, keep up the good work. Talk later. 🙂

I completely agree and thanks for the detailed commentary it’s much appreciated. I’ve taken GDP as a measure and I’m then building other measures around it – so tonight it’s the Gini coefficient for example. I wanted to use GDP to start because it’s the number that the press use to beat the rest of the world with. And as I move on through the series, I wanted to show how this doesn’t represent the whole story particularly when it comes to well being and how progress here and elsewhere, isn’t always really progress of any kind… so hopefully you’ll find that slant as the series progresses.

The domain name will come – but I’m still trying to compensate for losses incurred by a client doing a runner on a big bill, so it’s not going to be quick. But I’d be happy with a few rage commenters too, it’s always nice to have differences of opinion on these things. 🙂

Its all relative really! There might be a larger number of billionaires being churned out, but I gather there is not that much of a difference in the average persons life. Its the divide, in India at least and I am assuming it is more or less the same in China, that is scary!

This is a really great article, I doubt most people think about GDP growth in these terms. It’s depressing how far behind countries like Burundi are. I’ve been to Honduras and El Salvador in central America and they are very similar to China as far as living quality. Something else that should be noted is that GDP growth is normally centered around urban areas in developing countries and some of the rural areas may see no growth at all.